How To Invest In Alvin Community College

Transcription

1 ALVIN COMMUNITY COLLEGE INVESTMENT POLICY

2 ALVIN COMMUNITY COLLEGE INVESTMENT POLICY PREFACE The purpose of this document is to set forth specific investment policy and strategy guidelines for Alvin Community College (ACC) in order to achieve the goals of safety, liquidity, yield, and public trust for all investment activity. The Board of Regents of ACC shall review its investment strategies and policy not less than annually. This policy serves to satisfy the statutory requirement (specifically the Public Funds Investment Act, Article 342a-2 V.T.C.S. (the Act ) to define, adopt, and review a formal investment strategy and policy. It is the policy of Alvin Community College that, giving due regard to the safety and risk of investment, all available funds shall be invested in conformance with State and Federal regulations, applicable Bond Resolution requirements, adopted Investment Policy, and adopted Investment Strategy. Effective investment strategy development coordinates the primary objectives of the College s Investment Policy and cash management procedures with investment security risk/return analysis to enhance interest earnings and reduce investment risk and aggressive cash management to increase the available investment period. Maturity selections shall be based on cash flow and market conditions to take advantage of interest earnings as a viable and material revenue to all College funds. ACC s portfolio shall be designed and managed in a manner responsive to the public trust and consistent with the Investment Policy. Each major fund type has varying cash flow requirements and liquidity needs. Therefore specific strategies shall be implemented considering the fund s unique requirements. ii

3 INVESTMENT STRATEGY ACC maintains a pooled investment portfolio that utilizes specific investment strategy considerations designed to address the unique characteristics of the fund groups represented in the portfolio. In order to minimize risk of loss due to interest rate fluctuations, investment maturities will not exceed the anticipated cash flow requirements of the funds. The composite portfolio will have a dollar weighted average maturity of 365 days or less. This dollar weighted average maturity will be calculated using the stated final maturity dates of each security. Investment guidelines by fund-type are as follows: $ Investment strategies for operating funds have as their primary objective to assure that anticipated cash flows are matched with adequate investment liquidity. The secondary objective is to create a portfolio structure that will experience minimal volatility during economic cycles. This may be accomplished by purchasing high quality, short- to medium-term securities that will complement each other in a laddered structure. $ Investment strategies for debt service funds shall have as the primary objective the assurance of investment liquidity adequate to cover the debt service obligations on the required payment date. Securities purchased shall not have a stated final maturity date which exceeds the debt service payment date, or funds shall be maintained in an investment pool or money market mutual fund to be available for debt service payments. Investment strategies for bond funds and for debt service reserve funds shall have as the primary objective the ability to generate a dependable revenue source to the appropriate fund from securities with a low degree of volatility. Except as may be required by the bond ordinance specific to an individual issue, securities should be of high quality, with short to medium term maturities. A singular repurchase agreement may be utilized if disbursements are allowed in the amount necessary to satisfy any expenditure request. This investment structure is commonly referred to as a flexible repurchase agreement. iii

4 ALVIN COMMUNITY COLLEGE INVESTMENT POLICY I. POLICY It is the policy of Alvin Community College (the College) that after allowing for the anticipated cash flow requirements of the College and giving due consideration to the safety and risk of investment, all available funds shall be invested in conformance with these legal and administrative guidelines and to the maximum extent possible, at the highest rates obtainable at the time of investment. Effective cash management is recognized as essential to good fiscal management. Investment interest is a viable and material source of revenue to College funds. The College s investment portfolio shall be designed and managed in a manner designed to maximize this revenue source, to be responsive to public trust, and to be in compliance with legal requirements and limitations. Investments shall be made with the primary objectives of: * Safety and preservation of principal * Maintenance of sufficient liquidity to meet operating needs * Maximization of yield on the portfolio * Diversify as to maturity, instruments and financial institutions * Public trust from prudent investment activities II. PURPOSE The purpose of this investment policy is to comply with Chapter 2256 of Title 10 of the Local Government Code ( Public Funds Investment Act ) which requires each college to adopt a written investment policy regarding the investment of its funds and funds under its control. The Investment Policy addresses the methods, procedures, and practices which must be exercised to ensure effective and judicious fiscal management of College funds. III. SCOPE This Investment Policy shall govern the investment of all financial assets of Alvin Community College including: Local funds in the College s depository bank (Operating funds) State funds retained in local banks (Operating funds) Endowment Funds earnings accumulated before final distribution to designated recipients Current restricted funds from gifts and grants (Operating funds) Unexpended plant funds (Reserve funds) Reserve funds (Reserve funds) Auxiliary enterprise funds (Auxiliary funds) Capital Project Funds Unexpended Bond Proceeds (Reserve funds) Debt Service Interest and Sinking Funds The Board of Regents of Alvin Community College authorizes the investment officer(s) to co-mingle the College s funds to allow the purchases of investment instruments that will maximize the yield to all funds. 1

5 The College will consolidate cash balances from all funds to maximize investment earnings. Investment income will be allocated to the various funds based on their respective participation and in accordance with generally accepted accounting principles. This Investment Policy shall apply to all transactions involving the financial assets and related activity for all the foregoing funds. IV. INVESTMENT OBJECTIVES The College shall manage and invest its cash with five primary objectives, listed in order of priority: safety, liquidity, yield, public trust, and diversification. The safety of the principal invested always remains the primary objective. All investments shall be designed and managed in a manner responsive to the public trust and consistent with state and local law. The College shall maintain a comprehensive cash management program which includes collection of accounts receivable, vendor payments in accordance with invoice terms, and prudent investment of available cash. Cash management is defined as the process of managing monies in order to insure maximum cash availability and maximum yield on short-term investment of pooled idle cash. Safety Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit and interest rate risk. Credit Risk - The College will minimize credit risk, the risk of loss due to the failure of the security issuer or backer, by: Limiting investments to the safest types of securities Pre-qualifying the financial institutions, brokers/dealers, intermediaries, and advisers with which the College will do business Diversifying the investment portfolio so that potential losses on individual securities will be minimized Interest Rate Risk - the College will minimize the risk that the market value of securities in the portfolio will fall due to changes in general interest rates, by: Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity Investing operating funds primarily in shorter-term securities, money market mutual funds, or similar investment pools Liquidity The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands. A portion of the portfolio will also be placed in money market mutual funds or local government investment pools which offer same day liquidity for shortterm funds. Yield The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment risk constraints and 2

6 liquidity needs. Return on investment is of secondary importance compared to the safety and liquidity objectives described above. The core of investments is limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. Public Trust All participants in the College s investment process shall seek to act responsibly as custodians of the public trust. Investment officials shall avoid any transaction which might impair public confidence in the College s ability to govern effectively. Diversify Diversify investment as to maturity, instruments, and financial institutions where permitted under state law. It will be the policy of this institution to diversify its portfolio to eliminate the risk of loss resulting from over concentration of assets in a specific maturity, issuer or class investment. Delegation of Authority V. RESPONSIBILITY AND CONTROL The College President or designee, who may be a contractor, shall serve as the investment officer of the District and invest District funds in legally authorized and adequately secured investments identified in this policy. All investment transactions shall be executed on a delivery versus payment basis. No person may engage in an investment transaction or the management of funds except as provided under the terms of this Investment Policy as approved by the Board of Regents. The investment authority granted to the investing officers is effective until rescinded by the governing body. Training Requirement The Dean of Financial & Administrative Services, Director of Fiscal Affairs/Comptroller, and other investment officers shall attend an investment training session no less often than once every two fiscal years commencing June 1, 2002 and shall receive not less than five (5) hours of instruction relating to investment responsibilities. The investment training session shall be provided by an independent source approved by the Texas Higher Education Coordinating Board. (Currently, training is provided by the Center for Public Management, University of North Texas.) Internal Controls The Dean of Financial & Administrative Services and the Director of Fiscal Affairs/Comptroller are responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the entity are protected from loss, theft, or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely to be derived; and (2) the valuation of costs and benefits requires estimates and judgments by management. Accordingly, the Dean of Financial & Administrative Services shall establish a process for annual independent review by an external auditor to assure compliance with policies and procedures. The internal controls shall address the following points. $ Control of collusion $ Separation of transactions authority from accounting and record keeping $ Custodial safekeeping $ Avoidance of physical delivery securities 3

7 $ Clear delegation of authority to subordinate staff members $ Written confirmation for telephone (voice) transactions for investments and wire transfers $ Development of a wire transfer agreement with the depository bank or third party custodian $ Documentation of transactions and strategies Prudence The standard of prudence to be applied by the investment officer shall be the prudent investor rule which states: Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. In determining whether an investment officer has exercised prudence with respect to an investment decision, the determination shall be made taking into consideration: $ The investment of all funds, or funds under the College s control, over which the officer had responsibility rather than a consideration as to the prudence of a single investment $ Whether the investment decision was consistent with the written investment policy of the College Indemnification The investment officer, acting in accordance with written procedures and exercising due diligence, shall not be held personally responsible for a specific security s credit risk or market price changes, provided that these deviations are reported immediately and the appropriate action is taken to control adverse developments. Ethics and Conflicts of Interest Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with the proper execution and management of the investment program, or that could impair their ability to make impartial decisions. Employees and investment officials shall disclose any material interests in financial institutions with which they conduct business. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. Employees and officers shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the College. An investment officer of the College who has a personal business relationship with an organization seeking to sell an investment to the College shall file a statement disclosing that personal business interest. An investment officer who is related within the second degree by affinity or consanguinity to an individual seeking to sell an investment to the College shall file a statement disclosing that relationship. A statement required under this subsection must be filed with the Texas Ethics Commission and the governing body of the entity. Portfolio Management VI. SUITABLE AND AUTHORIZED INVESTMENTS The College currently has a buy and hold portfolio strategy. Maturity dates are matched with cash flow requirements and investments are purchased with the intent to be held until maturity. However, securities may be sold before they mature if market conditions present an opportunity for the College to benefit from the trade. Securities may be sold for the following reasons: $ A security with declining credit may be sold early to minimize loss of principal $ A security swap would improve the quality, yield, or target duration in the portfolio $ Liquidity needs of the portfolio require that the security be sold 4

8 Investments Assets of the College may be invested in the following instruments; provided, however, that at no time shall assets of the College be invested in any instrument or security not authorized for investment under the Act, as the Act may from time to time be amended. Authorized 1. Obligations of the United States of America, its agencies and instrumentalities. 2. Certificates of Deposit of state and national banks, a savings and loan association, or a state or federal credit union, that has its main office or a branch office in this state that is guaranteed or insured by the Federal Deposit Insurance or its successor or secured by obligations in a manner and amount provided by law for deposits of the investing entity. The College may also select a depository institution that has its main office or a branch office in Texas to arrange and act as custodian for the deposit of funds in certificates of deposit in one or more depository institutions, wherever located. Each certificate of deposit in an out-of-state institution must be federally insured for the full amount of the principal and accrued interest. 3. Fully collateralized direct repurchase agreements with a defined termination date secured by obligations of the United States or its agencies and instrumentalities pledged to the College, held in the College s name, and deposited at the time the investment is made with the College or with a third party selected and approved by the College. Repurchase agreements must be purchased through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in this state. A Master Repurchase Agreement must be signed by the counterparty prior to investment in a repurchase agreement. All repurchase agreement transactions will be on a delivery vs. payment basis. Securities received for repurchase agreements must have a market value greater than or equal to 102 percent at the time funds are disbursed. 4. Money Market Mutual funds that are 1) registered and regulated by the SEC, 2) have a dollar weighted average stated maturity of 90 days or less, and 3) maintain a net asset value of $1 for each share. 5. Investment Pools as approved by Board resolution and which are authorized by the Public Funds Investment Act as enacted or as it may be amended from time to time. Pool must have an advisory board as specified by the Act. Must be rated not less than AAA or an equivalent rating by at least one nationally recognized rating service. Additionally, any pool created to function as a money market mutual fund must mark its portfolio market daily and stabilize at a $1 net asset value. 6. Mutual Funds registered with the SEC. Must have an average weighted maturity of less than two years and can only invest in obligations approved by the Act. Mutual Funds also rated not less than AAA or its equivalent by at least one nationally recognized investment rating firm. Investment in these Mutual Funds is limited to 15% of monthly average fund balance, excluding bond proceeds, reserves and debt service funds, as these are ineligible funds to be invested. Finally, the investment may not own more than 10% of the fund s total assets. 7. Commercial paper, rated in the highest tier (e.g., A-1, P-1, F-1, or D-1 or higher) by a nationally recognized rating agency. 5

9 Not Authorized The following are not authorized investments under Section (b): 1. Obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal. 2. Obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security collateral and bears no interest. 3. Collateralized mortgage obligations that have a stated final maturity date of greater than 10 years. 4. Collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. Cash Flow Projections VII. ESTIMATING FUNDS AVAILABLE FOR INVESTMENT Based upon past experience and upon identifiable anticipated expenditures, cash requirements should be projected for a reasonable period into the future, such as a fiscal year, with frequent updating based upon new information as it becomes available. Scheduling Investment Maturities Based upon the cash flow projections, investments should be scheduled to mature to make cash available to meet expenditure requirements on a timely basis. Flexible Investment Reserve Recognizing that it is not always possible to anticipate cash requirements entirely accurately, an appropriate amount of temporarily invested funds may be in eligible but readily marketable investments so that income may not be sacrificed, as would be the case in requesting early maturity of a time deposit investment. Due to the fact that market values of federal paper do fluctuate, this should be regarded not as a guarantee against any loss whatsoever, but as a hedge against such loss. Current Cash Balances Maximum utilization of the cash flow may be achieved by using balances per the bank rather than book balances. Arrangements may be made with the bank to provide this data on a daily basis by telephone to an authorized individual at the institution. Maximum Maturities VIII. INVESTMENT PARAMETERS The longer the maturity of investments, the greater their price volatility. Therefore, it is the College s policy to concentrate its investment portfolio in shorter-term securities in order to limit principal risk caused by changes in interest rates. The College attempts to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the College will not directly invest in securities maturity more than three (3) years 6

10 from the date of purchase; however, the above described obligations, certificates, or agreements may be collateralized using longer dated investments. Because no secondary market exists for repurchase agreements, the maximum term for non-bond fund transactions shall be 120 days. The maximum investment term of a flexible repurchase agreement shall be the anticipated cash flow requirements of the projects or the temporary period, as defined by Federal Tax Law, whichever is shorter. Excluding the bond funds, the composite portfolio will have a weighted average maturity of one (1) year or less. This dollar weighted average maturity will be calculated using the stated final maturity dates of each security. Diversification ACC recognizes that investment risks can result from issuer defaults, market price changes, or various technical complications leading to temporary illiquidity. Risk is controlled through portfolio diversification which shall be achieved by the following general guidelines: $ Limiting investments to avoid overconcentration in securities from a specific issuer or business sector (excluding U.S. Treasury securities), $ Limiting investment in securities that have higher credit risks, $ Investing in securities with varying maturities, and $ Continuously investing a portion of the portfolio in readily available funds such as money market funds or overnight repurchase agreements to ensure that appropriate liquidity is maintained in order to meet ongoing obligations. The following maximum limits, by instrument, are established for the College s total portfolio: 1. U.S. Treasury Securities % 2. Certificates of Deposit % 3. Flexible Repurchase Agreements % 4. Authorized Pools % 5. Money Market Mutual Funds... 75% 6. Mutual Funds... 50% 7. Agencies and Instrumentalities... 75% 8. Repurchase Agreements (excluding flexible repurchase agreements)... 50% 9. Commercial Paper... 25% Depository IX. SELECTION OF BANKS AND DEALERS At least every six years a Depository shall be selected through the College s bid process, which shall include a formal request for proposal (RFP). The selection of a depository will be determined by competitive bid and evaluation of bids will be based on the following selection criteria: $ The ability to qualify as a depository for public funds in accordance with state and local laws $ The ability to provide requested information or financial statements for the periods specified $ The ability to meet all requirements in the banking RFP $ Complete response to all required items on the bid form $ Lowest net banking service cost, consistent with the ability to provide an appropriate level of service $ The credit worthiness and financial stability of the bank $ Other factors deemed to be in the best interest of the College 7

11 Authorized Brokers/Dealers The College shall select dealers reporting to the Market Reports Division of the Federal Reserve Board of New York, also known as Primary Government Security Dealers, or regional dealers that qualify under Securities and Exchange Commission (SEC) Rule 15C3-1 (uniform net capital rule). All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply the following as appropriate: $ audited financial statements $ completed broker/dealer questionnaire $ certification of having read and understood the College s investment policy and agreeing to comply with the policy The governing body must adopt and annually review a list of qualified broker/dealers authorized to engage in investment transactions with the College. Competitive Bids Competitive quotes must be taken from at least three qualifying institutions for any non-depository bank investment transaction. Investment transactions may be done orally, but followed by electronic or written confirmation. Funds will be authorized to be released after notification that the purchased security has been received. Written confirmation shall be received from the financial institution or broker/dealer. All investments purchased will be held in safekeeping at a third party custodial institution with a safekeeping receipt being sent to the College. Delivery vs. Payment Securities shall be purchased using the delivery vs. payment method with the exception of investment pools and mutual funds. Funds shall not be wired or paid until verification has been made that the correct security was received by the Trustee. The security shall be held in the name of the College or held on behalf of the College. The Trustee s records shall assure the notation of the College s ownership of or explicit claim on the securities. The original copy of all safekeeping receipts shall be delivered to the College. Safekeeping Agreement X. SAFEKEEPING OF SECURITIES The College shall contract with a bank or banks for the safekeeping of securities either owned by the College as part of its investment portfolio or held as collateral to secure demand or time deposits. Safekeeping All securities owned by the College shall be held by its safekeeping agent, except the collateral for certificates of deposits in banks. The collateral for certificates of deposit in banks will be registered in the College s name in the bank s trust department or, alternatively, in a Federal Reserve Bank account in the College s name, or a third-party bank in the College s name, at the College s discretion. Original safekeeping receipts shall be obtained. Collateralization Consistent with the requirements of the Public Funds Collateral Act, it is the policy of the College to require full collateralization of all College investments and funds on deposit with a depository bank, other than investments which are obligations of the U.S. government and its agencies and instrumentalities. In 8

12 order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 102% of market value of principal and accrued interest on the deposits or investments less an amount insured by FDIC. At its discretion, the College may require a higher level of collateralization for certain investment securities. Securities pledged as collateral shall be held by an independent third party with whom the College has a current custodial agreement. The Dean of Financial & Administrative Services is responsible for entering into collateralization agreements with third party custodians in compliance with this Policy. The agreements are to specify the acceptable investment securities for collateral, including provisions relating to possession of the collateral, the substitution or release of investment securities, ownership of securities, and the method of valuation of securities. A clearly marked evidence of ownership (safekeeping receipt) must be supplied to the College and retained. Collateral shall be reviewed at least weekly to assure that the market value of the pledged securities is adequate. Collateral Defined Alvin Community College shall accept only the following securities as collateral: $ FDIC and FSLIC insurance coverage $ A bond, certificate of indebtedness, or debenture of the United States or its agencies and instrumentalities, or other evidence of indebtedness that is guaranteed as to principal and interest by the United States or its agencies and instrumentalities $ Obligations, the principal and interest on which, are unconditionally guaranteed or insured by the State of Texas $ A bond of the State of Texas or of a county, city or other political subdivision of the State of Texas having been rated as investment grade (investment rating no less than A or its equivalent) by a nationally recognized rating agency with a remaining maturity of ten (10) years or less Subject to Audit All collateral shall be subject to inspection and audit by the Dean of Financial & Administrative Services or the College s independent auditors. Performance Standards XI. PERFORMANCE The College s investment portfolio will be managed in accordance with the parameters specified within this policy. The portfolio shall be designed with the objective of obtaining a rate of return through budgetary and economic cycles, commensurate with the investment risk constraints and the cash flow requirements of the college. Weighted average yield to maturity shall be the standard performance measurement for the portfolio. Performance Benchmark It is the policy of the College to purchase investments with maturity dates coinciding with cash flow needs. Through this strategy, the College attempts to purchase the highest yielding allowable investments available on the market at that time. Market value will be calculated on a quarterly basis on all securities owned and compared to current book value of those securities to determine portfolio performance during that period of time. The College s portfolio shall be designed with the objective of regularly meeting or exceeding the average rate of return on U.S. Treasury Bills at a maturity level comparable to the College s weighted average maturity in days. Investment officers will maintain an independent document that lists all College investments with rates of return and other pertinent data. 9

13 XII. REPORTING Methods The Investment Officer shall prepare an investment report on a quarterly basis that summarizes investment strategies employed in the most recent quarter and describes the portfolio in terms of investment securities, maturities, and shall explain the total investment return for the quarter. The quarterly investment report shall include a summary statement of investment activity prepared in compliance with generally accepted accounting principals. This summary will be prepared in a manner which will allow the College to ascertain whether investment activities during the reporting period have conformed to the Investment Policy. The report will be provided to the Board of Regents. The report will include the following: $ A listing of individual securities held at the end of the reporting period $ Unrealized gains or losses resulting from appreciation or depreciation by listing the beginning and ending book and market value of securities for the period $ Additions and changes to the market value during the period $ Average weighted yield to maturity of portfolio as compared to applicable benchmark $ Listing of investments by maturity date $ Fully accrued interest for the reporting period $ The percentage of the total portfolio which each type of investment represents $ Statement of compliance of the College s investment portfolio with state law and the investment strategy and policy approved by the Board of Regents A formal annual review of the quarterly reports will be performed by an independent auditor with the results reported to the governing board. XIII. INVESTMENT POLICY ADOPTION The Alvin Community College investment policy shall be adopted by resolution of the Board of Regents. It is the College s intent to comply with state laws and regulations. The College s investments policies shall be subject to revisions to stay current with changing laws, regulations, and needs of the College. The policy shall be reviewed annually by the Board of Regents and any changes or modifications must be approved by the Board of Regents. Compliance Audit XIV. STATE AUDITOR S SPECIFIC INVESTMENT REPORTING REQUIREMENTS A compliance audit shall be performed by the College s external auditor in the fall of all odd numbered years. Results of this audit shall be sent to the State Auditor s Office by January 1 of each evennumbered year. Quarterly Investment Reporting The quarterly investment report will be published on the College s web site. The report will follow the format prescribed by Texas Government Code, Section The report will be $ published on an indexed page titled Investment Disclosure $ published fewer than 90 days after the end of the quarter or 7 days after the investment report is presented to the Board of Regents 10

14 $ maintained on the web site for at least two years. Annual Investment Reporting By January 1 of each year, the college will publish on its web site and submit to the State Auditor s Office, the Comptroller of Public Accounts, the Governor s Office, and the Legislative Budget Board, an annual report of its investment assets as of August 31 of the previous year. The investment report will cover all portfolios and entities required to be included in the institution s annual financial report in accordance with Statement No. 39 of the Governmental Accounting Standards Board. The College will also address and answer the questions listed and publish such answers on the College s web site. $ Does the institution employ outside investment advisors or managers and, if so, who are they (provide individual or firm name and address)? Do the outside investment advisors or managers have the authority to make investment decisions without obtaining prior approval? $ Does the institution use soft dollar arrangements (a means of paying for services through brokerage commission revenue rather than through direct payments)? (If the answer to this question is yes, the institution must provide a copy of the guidelines that govern the use of soft dollar arrangements.) $ Is the institution associated with an independent endowment or foundation? (If the answer to this question is yes, the institution must provide contact information [name and address] for the individual[s] who manage the independent endowment or foundation. The institution must also provide, if available, the market value of the endowment s or foundation s investments.) 11

15 GLOSSARY OF COMMON TREASURY TERMINOLOGY Accrued Interest: The accumulated interest due on a bond as of the last interest payment made by the issuer. Agency: A debt security issued by a federal or federally sponsored agency. Federal agencies are backed by the full faith and credit of the U.S. Government. Federally sponsored agencies (FSAs) are backed by each particular agency with a market perception that there is an implicit government guarantee. An example of federal agency is the Government National Mortgage Association (GNMA). Amortization: The systematic reduction of the amount owed on a debt issue through periodic payments of principal. Asked: The price at which securities are offered. Average Life: The average length of time that an issue of serial bonds and/or term bonds with a mandatory sinking fund feature is expected to be outstanding. Basis Point: A unit of measurement used in the valuation of fixed-income securities equal to 1/100 of a percent of yield. E.g., 1/4 of 1 percent is equal to 25 basis points. Bid: The indicated price at which a buyer is willing to purchase a security or commodity. Book Value: The value at which a security is carried on the inventory lists or other financial records of an investor. The book value may differ significantly from the security s current value in the market. Broker: A broker brings buyers and sellers together for a commission paid by the initiator of the transaction or by both sides; he does not position. In the money market, brokers are active in markets in which banks buy and sell money and in interdealer markets. Callable Bond: A bond issue in which all or part of its outstanding principal amount may be redeemed before maturity by the issuer under specified conditions. Call Price: The price at which an issuer may redeem a bond prior to maturity. The price is usually at a slight premium to the bond s original issue price to compensate the holder for loss of income and ownership. Call Risk: The risk to a bondholder that a bond may be redeemed prior to maturity. Cash Sale/Purchase: A transaction which calls for delivery and payment of securities on the same day that the transaction is initiated. Certificate of Deposit (CD): A time deposit with a specific maturity evidenced by a certificate. Largedenomination CD s are typically negotiable. Collateralization: Process by which a borrower pledges securities, property, or other deposits for the purpose of securing the repayment of a loan and/or security. Commercial Paper: An unsecured short-term promissory note issued by corporations, with maturities ranging from 2 to 270 days. Convexity: A measure of a bond s price sensitivity to changing interest rates. A high convexity indicates greater sensitivity of a bond s price to interest rate changes. 12

16 Coupon Rate: The annual rate of interest received by an investor from the issuer of certain types of fixed-income securities. Also known as the interest rate. Credit Quality: The measurement of the financial strength of a bond issuer. This measurement helps an investor to understand an issuer s ability to make timely interest payments and repay the loan principal upon maturity. Generally, the higher the credit quality of a bond issuer, the lower the interest rate paid by the issuer because the risk of default is lower. Credit quality ratings are provided by nationally recognized rating agencies. Credit Risk: The risk to an investor that an issuer will default in the payment of interest and/or principal on a security. Current Yield (Current Return): A yield calculation determined by dividing the annual interest received on a security by the current market price of that security. Dealer: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. Debenture: A bond secured only by the general credit of the issuer. Delivery versus Payment: There are two methods of delivery of securities: delivery versus payment and delivery versus receipt (also called free). Delivery versus payment is delivery of securities with an exchange of money for the securities. Delivery versus receipt is the delivery of securities with an exchange of a signed receipt for the securities. Derivative Security: Financial instrument created from or whose value depends upon, one or more underlying assets or indexes of asset values. Discount: The amount by which the par value of a security exceeds the price paid for the security. Discount Securities: Non-interest bearing money market instruments that are issued at a discount and redeemed at maturity for full face value, e.g., U.S. Treasury Bills. Diversification: A process of investing assets among a range of security types by sector, maturity, and quality rating. Duration: A measure of the timing of the cash flows, such as the interest payments and the principal repayment, to be received from a given fixed-income security. This calculation is based on three variables: term to maturity, coupon rate, and yield to maturity. The duration of a security is a useful indicator of its price volatility for given changes in interest rates. Fair Value: The amount at which an investment could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Federal Funds (Fed Funds): Funds placed in Federal Reserve banks by depository institutions in excess of current reserve requirements. These depository institutions may lend fed funds to each other overnight or on a longer basis. They may also transfer funds among each other on a same-day basis through the Federal Reserve banking system. Fed funds are considered to be immediately available funds. Federal Funds Rate: Interest rate charged by one institution lending federal funds to the other. Federal Credit Agencies: Agencies of the Federal government set up to supply credit to various classes of institutions and individuals, e.g., S&L s, small business firms, students, farmers, farm cooperatives, and exporters. 13

17 Federal Deposit Insurance Corporation (FDIC): A federal agency that insures bank deposits, currently up to $100,000 per deposit. Federal Home Loan Banks (FHLB): The institutions that regulate and lend to savings and loan associations. The Federal Home Loan Banks play a role analogous to that played by the Federal Reserve Banks vis-a vis member commercial banks. Federal National Mortgage Association (FNMA): FMNA, like GNMA, was chartered under the Federal National Mortgage Association Act in FNMA is a federal corporation working under the auspices of the Department of Housing and Urban Development, H.U.D. It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called, is a private stockholderowned corporation. The corporation s purchases include a variety of adjustable mortgages and second loans in addition to fixed-rate mortgages. FNMA s securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest. Federal Open Market Committee (FOMC): consists of seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent member while the other Presidents serve on a rotating basis. The committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of Government Securities in the open-market as a means of influencing the volume of bank credit and money. Federal Reserve System: The central bank of the United States created by Congress and consisting of a seven member Board of Governors in Washington, D.C., 12 regional banks and about 5,700 commercial banks that are members of the system. Government National Mortgage Association (GNMA or Ginnie Mae): Securities guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations, and other institutions. Security holder is protected by full faith and credit of the U.S. Government. Ginnie May securities are backed by FHA, VA, or FMHM mortgages. The term pass through is often used to describe Ginnie Maes. Government Securities: An obligation of the U.S. government, backed by the full faith and credit of the government. These securities are regarded as the highest quality of investment securities available in the U.S. securities market. See Treasury Bills, Notes, and Bonds. Interest Rate: See Coupon Rate. Interest Rate Risk: The risk associated with declines or rises in interest rates which cause an investment in a fixed-income security to increase or decrease in value. Internal Controls: An internal control structure designed to ensure that the assets of the entity are protected from loss, theft, or misuse. The internal control structure is designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognized that 1) the cost of a control should not exceed the benefits likely to be derived and 2) the valuation of costs and benefits requires estimates and judgments by management. Internal controls should address the following points: Control of collusion - Collusion is a situation where two or more employees are working in conjunction to defraud their employer. Separation of transaction authority from accounting and record keeping - By separating the person who authorizes or performs the transaction from the people who record or otherwise account for the transaction, a separation of duties is achieved. 14

18 Custodial safekeeping - Securities purchased from any bank or dealer including appropriate collateral (as defined by state law) shall be placed with an independent third party for custodial safekeeping. Inverted Yield Curve: A chart formation that illustrates long-term securities having lower yields than short-term securities. This configuration usually occurs during periods of high inflation coupled with low levels of confidence in the economy and a restrictive monetary policy. Investment Policy: A concise and clear statement of the objectives and parameters formulated by an investor or investment manager for a portfolio of investment securities. Investment-grade Obligations: An investment instrument suitable for purchase by institutional investors under the prudent person rule. Investment-grade is restricted to those obligations rated BBB or higher by a rating agency. Liquidity: A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narrow and reasonable size can be done at those quotes. Local Government Investment Pool (LGIP): An investment by local governments in which their money is pooled as a method for managing local funds. Market-to-market: The process whereby the book value or collateral value of a security is adjusted to reflect its current market value. Market Risk: The risk that the value of a security will rise or decline as a result of changes in market conditions. Market Value: Current market price of a security. Master Repurchase Agreement: To protect investors, many public investors will request that repurchase agreements be preceded by a master repurchase agreement between the investor and the financial institution or dealer. The master agreement should define the nature of the transaction, identify the relationship between the parties, establish normal practices regarding ownership and custody of the collateral securities during the term of the investment, provide remedies in the case of default by either party, and clarify issues of ownership. The master repurchase agreement protects the investor by eliminating the uncertainty of ownership and hence, allowing investors to liquidate collateral if a bank or dealer defaults during the term of the agreement. Maturity: The date on which payment of a financial obligation is due. The final stated maturity is the date on which the issuer must retire a bond and pay the face value to the bondholder. See Weighted Average Maturity. Money Market: The market in which short-term debt instruments (bills, commercial paper, bankers acceptances, etc.) are issued and traded. Money Market Mutual Fund: Mutual funds that invest solely in money market instruments. Mutual Fund: An investment company that pools money and can invest in a variety of securities, including fixed-income securities and money market instruments. Mutual funds are regulated by the Investment Company Act of National Association of Securities Dealers (NASD): A self-regulatory organization (SRO) of brokers and dealers in the over-the-counter securities business. Its regulatory mandate includes authority over firms that distribute mutual fund shares as well as other securities. 15

19 Net Asset Value: The market value of one share of an investment company, such as a mutual fund. This figure is calculated by totaling a fund s assets which includes securities, cash, and any accrued earnings, subtracting this from the fund s liabilities and dividing this total by the number of shares outstanding. This is calculated once a day based on the closing price for each security in the fund s portfolio. No Load Mutual Fund: A mutual fund which does not levy a sales charge on the purchase of its shares. Nominal Yield: The stated rate of interest that a bond pays its current owner, based on par value of the security. It is also known as the coupon, coupon rate, or interest rate. Offer: An indicated price at which market participants are willing to sell a security or commodity. Also referred to as the ask price. Open Market Operations: Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit; sales have the opposite effect. Open market operations are the Federal Reserve s most important and most flexible monetary policy tool. Par: Face value or principal value of a bond, typically $1,000 per bond. Portfolio: Collection of securities held by an investor. Positive Yield Curve: A chart formation that illustrates short-term securities having lower yields than long-term securities. Premium: The amount by which the price paid for a security exceeds the security s par value. Prime Rate: A preferred interest rate charged by commercial banks to their most creditworthy customers. Many interest rates are keyed to this rate. Primary Dealer: A group of government securities dealers that submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC) registered securities broker-dealers, banks, and a few unregulated firms. Principal: The face value or par value of a debt instrument. Also may refer to the amount of capital invested in a given security. Prospectus: A legal document that must be provided to any prospective purchaser of a new securities offering registered with the SEC. This can include information on the issuer, the issuer s business, the proposed use of proceeds, the experience of the issuer s management, and certain certified financial statements. Prudent Person Rule: An investment standard outlining the fiduciary responsibilities of public funds investors relating to investment practices. Qualified Public Depositories: A financial institution which does not claim exemption from the payment of any sales or compensating use or ad valorem taxes under the laws of the state, which has segregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability and which has been approved by the Public Deposit Protection Commission to hold public deposits. Rate of Return: The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond or the current income return. 16

20 Reinvestment Risk: The risk that a fixed income investor will be unable to reinvest income proceeds from a security holding at the same rate of return currently generated by that holding. Repurchase Agreement (RP or REPO): An agreement of one party to purchase securities at a specified price from a second party and a simultaneous agreement by the first party to resell the securities at a specified price to the second party on demand or at a specified date. Safekeeping: Holding of assets (e.g., securities) by a financial institution. SEC Rule 15C3-1: See uniform net capital rule. Secondary Market: A market made for the purchase and sale of outstanding issues following the initial distribution. Securities & Exchange Commission: Agency created by Congress to protect investors in securities transactions by administering securities legislation. Serial Bond A bond issue, usually of a municipality, with various maturity dates scheduled at regular intervals until the entire issue is retired. Sinking Fund: Money accumulated on a regular basis in a separate custodial account that is used to redeem debt securities or preferred stock issues. Swap: Trading one asset for another. Term Bond: Bonds comprising a large part of all of a particular issue which come due in a single maturity. The issuer usually agrees to make periodic payments into a sinking fund for mandatory redemption of term bonds before maturity. Total Return: The sum of all investment income plus changes in the capital value of the portfolio. For mutual funds, return on an investment is composed of share price appreciation plus any realized dividends or capital gains. This is calculated by taking the following components during a certain time period. (Price Appreciation) + (Dividends Paid) + (Capital Gains) = Total Return Treasury Bills: A non-interest bearing discount security issued by the U.S. Treasury to finance the national debt. Most bills are issued to mature in three months, six months or one year in minimum denominations of $10, The yields on bills are monitored closely in the money markets for signs of interest rate trends. Treasury Bond: Long-term U.S. Treasury securities having initial maturities of more than ten years. Treasury Notes: Intermediate term coupon bearing U.S. Treasury securities having initial maturities from one to ten years. Currently, the longest outstanding maturity for such securities is 30 years. Uniform Net Capital Rule: Securities and Exchange Commission requirement that member firms as well as nonmember broker-dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to 1: also called net capital rule and net capital ratio. Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase securities. This is one reason new public issues are spread among members of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash. Volatility: A degree of fluctuation in the price and valuation of securities. Volatility Risk Rating: A rating system to clearly indicate the level of volatility and other non-credit risks associated with securities and certain bond funds. The ratings for bond funds range from those that have 17